If You Can’t Beat ‘Em…

TEXT Brian Watkinson

Our profession has seen an unprecedented flurry of merger activity in the past three years, everything from “mergers of peers” to outright acquisitions. Whenever I speak to groups of architects there is always talk about strategic alliances. My consulting firm is busy helping clients develop and implement their merger-and-acquisition strategies.

So, why this “urge to merge” in a profession that has traditionally been dominated by SMEs–small-to-medium enterprises? (With an emphasis in architecture, of course, on the “small.”) Here are just a few of the key factors that are driving this trend.

Expanding the Market for Their Services

Architects are working hard at building specialist expertise, creating their “value proposition” in order to differentiate themselves in an increasingly competitive environment. To maximize their return on that investment, they need to expand their market reach.

Toronto’s Dunlop Architects Inc. was acquired by Stantec Architecture in 2004. Chris Fillingham, who was the managing principal at Dunlop, says, “Our strategic plan concluded that we needed to expand our geographic opportunities because there was not enough potential work in Ontario to sustain and grow the practice.” They were also well aware that successful business development can often be as much about local relationships and presence as it is about expertise. Has the relationship with Stantec paid off? “We just won a new $400-million hospital in Grande Prairie, Alberta, that we would never have had access to as Dunlop.”

By joining with Perkins + Will, Vancouver-based Peter Busby reports that his firm has been able to extend its recognized leadership and influence in sustainable design into the US and beyond, and has “moved that firm to be a leader in the number of LEED APs among 1,350 staff worldwide, and a global leader in sustainable design.”

John Stephenson offers a different twist. In 2002, his firm merged with one of his major competitors in Thunder Bay, Ontario, to form “the largest and the only full-service firm” in the area. “Our merger allowed us to compete much more successfully with our out-of-town competitors who have been universally mid-sized to large firms.” Stephenson adds that the merger has also enabled Kuch Stephenson Gibson Malo Architects & Engineer to earn the respect of local clients, enabling them to act as prime consultant on large projects. They do bring in outside expertise, but always under the leadership and direction of the local firm.

In addition to opening up new markets and securing existing ones, a merger can help temper the potentially devastating impact of market cycles. Fillingham notes: “Last year, all of our health-care work in Ontario was put on hold. Meanwhile, Stantec offices in Alberta and BC had more work than they could comfortably handle. We in Ontario were able to support them, which allowed us to retain all of our staff, very talented people that we otherwise might have had to lay off. This year, with the Ontario projects back underway, we need them all.”

Looking to the future, expect to see more Canadian architects forming alliances with other complementary types of businesses to address a new market segment being driven by client demands for integrated project delivery. The integrated approach, which has been growing rapidly in the US, brings together, at the very beginning of a project, the designers, contractors, energy modellers, facilities managers and other experts who will then work with the client as a coordinated team to design and construct the building.

Tapping into Greater Human, Technical and Knowledge Resources

Jim Anderson’s firm, Archicon Canada, Inc., merged with Cohos Evamy last year. “For me, the key driver to become ‘part of something bigger’ was the instant access to a greater resource base–the merger was a form of ‘instant growth’ for my practice.”

Often, the need for additional human resources to complete current work is a motivator, especially in times like these when there is an acute shortage of available talent–a situation which, by the way, is very likely to be with us for some time. The merger can provide immediate access to a broader, more diverse pool from which to build project teams. The larger firm is also better positioned to invest in ongoing recruitment and retention strategies. For example, I’m seeing more and more practices implementing formal internal education programs to attract new staff and build the knowledge and skill sets of all of their employees. It’s a similar situation with IT where an alliance can create the critical mass necessary to adopt and sustain leading-edge technologies like Building Information Modelling. Of course, when a smaller firm links with a much larger one, it will often benefit immediately from the availability of more advanced technical resources.

Architects have been finding it harder and harder to simply “keep up” with extensive and rapid changes happening in the industry such as new building technologies, materials and systems. That challenge takes on a new dimension when we consider some fundamental shifts happening in practice: for example, the growing emphasis on sustainable design and life cycle considerations, or the various alternative delivery models that more owners are using like design-build, construction management and, more recently, public-private partnerships. Mergers and acquisitions can make it easier to build the broad and diverse knowledge base that is critical to delivering highly valued professional services to today’s demanding clients.

Transition and Succession Planning

I constantly hear from “seasoned practitioners” who say to me, “I’m looking over my shoulder for my succession plan, and there’s no one there!” A merger can address the challenge of succession planning in a number of ways. One party can simply become the succession plan for the other. In other cases, the resulting firm creates a larger base from which to build the succession plan. In addition, these relationships also provide new opportunities for mid-level firm members to move into more senior roles and ownership.

Sharing the Risk

The business and professional risks which architects face today are far greater than they have ever been before. Increased competition, both from within and outside of the profession, has sharply increased business risks. Clients are much less tolerant of professionals who deliver anything less than perfection and are not reluctant to pursue legal remedies when they believe their architects have fallen short. More recently, we have seen a major impetus on the part of public clients in particular to shift more and more risks to their service providers. This manifests itself in egregious requirements in RFPs and one-sided punitive contract terms. And, it’s becoming clear that the sudden interest across Canada in public-private partnerships is driven more by the objective of transferring risk to the private sector than it is by interest in accessing private financing for public infrastructure. One effective way to mitigate and manage risk is to share it with a larger group.

Greater Efficiency and Productivity

The kinds of processes, best practices and standards that contribute to efficiency, and presumably increased profitability, are often more readily established and maintained in a larger firm. A smaller practice acquired by a larger one usually adopts the established “corporate” standards and processes. Where smaller practices come together, they can pool their resources to become more efficient. David Lauzon, now a principal at NXL Architects, cites a key advantage for Levine Lauzon Architects in merging with NXL: “The benefits have been in our ability to realize common standards for drawing production and in proposal-writing. These have provided major gains in our productivity.”

With these and other factors stirring interest in merge
rs and strategic alliances, one can’t help wondering, “Is a merger for everyone? Are we witnessing the end of small practice?” Busby responds: “There will always be boutique firms. However, they will find it harder and harder to compete for institutional and developer work. Client groups have changed. They’re backed by pension funds. They look for three quotes and a long list of credits for every project. Mergers are absolutely necessary to grow, gain expertise and regional and national dominance.”

I’m often asked, “What is the biggest challenge faced when contemplating a strategic alliance?” There will naturally be some loss of independence, perhaps in decision-making, day-to-day operations, or even in architectural philosophy and style. The business terms and structures can become very complicated, but in the end, as Fillingham notes, “The commercial aspects can always be dealt with unless the parties are completely unrealistic.”

The one single factor that can bring a potential merger to a halt or unravel one that has already occurred is conflict between the “cultures” of the component firms. Stephenson recalls, “The ‘fit’ between the firms was of utmost importance.” He stresses the need to take the time to learn about each other and understand how the “chemistry” will work. “We ‘dated’ for a year and a half by collaborating on a couple of projects, then proposed the merger to the other firm as a way of solidifying a successful relationship.”

In the end, executed well, a merger or other form of alliance can bring tremendous personal and professional benefit and satisfaction. In Busby’s words, “It makes life so much richer, the architecture so much better.”

Led by architect and former Executive Director of the Ontario Association of Architects Brian Watkinson, Strategies 4 Impact! Inc. provides strategic support, advice and consulting services to businesses in the design and construction sector, their associations and clients. Brian can be contacted at brian@strategies4impact.com